As well as classifying each profile into a day type, which is really helpful when ascertaining how a day is likely to develop, we can also identify commercial activity with respect to that particular profile. Equipped with market profile logic we can determine whether the commercial contingent has been buying or selling and whether they’ve been doing it in a responsive or initiating fashion. We can also see, to a certain extent, at what prices they have been active. Finally this information can all be compiled into a long term auction chart.

There are three events that reflect other time frame trader’s activity or commercial players, as we call them. They are: -

Extremes

Also known as tails, extremes consist of two or more single prints at the top or bottom of the profile. At the bottom they are buying tails and the top selling tails. They can be either initiating or responsive, depending on their location to the previous session.

A selling tail above the previous session’s value area is responsive selling (RS) and a buying tail within, or higher, is initiating (IB). The converse is also true. A buying tail below the previous value area is a responsive buying tail (RB). A selling tail within or below the previous value area is initiating selling activity (IS).

Range Extensions

Any move outside the initial balance, the first half hour of the session, is a range extension. An up move is a buying range extension and a down move is a selling extension.

As with extremes, initiating or selling activity is determined by the location of the event relative to the previous day’s value area. Buying within, or above the previous value area is an initiating buying range extension (IB) and below is responsive buying activity (RB). Conversely selling within or below the previous day’s value area is an initiating selling range extension (IS). Selling above the previous value area is an example of responsive selling (RS).

Tpo count

The tpo count is a good measure of trade facilitation. If there is a greater number of tpo’s below the point of control than above that price, the tpo count is registered as buying activity. A higher number of tpo’s above the point of control is selling activity.

Once again the location of the new value area, relative to the previous day’s value area, determines whether the activity is responsive or initiating. It must be wholly outside the previous day’s value area to be responsive. If the two value areas overlap, then it is seen as initiating activity. It’s also initiating activity if the new value area is wholly above the previous day’s value area, in the case of a buying tpo count, or below in the case of a selling tpo count.

Transferring the information to the Long Term Auction Chart

The appropriate information from each day profile can be transferred to the long term auction chart by extracting the profile information into a few vertical lines as in the diagram below.

Fig 108

The black line is the days range. The red line is the initial balance, the first hour of trading. The vertical blue line is the value area, which is very close to the first standard deviation of the distribution. The small horizontal blue line is the point of control, the most traded price in the sample.

The profile then has to be classified into a day type and the commercial activity analysed relative to the previous day’s value area. In the case of the above diagram (fig 108) let’s assume the whole day’s range is above yesterday’s value area. Therefore the first and strongest signal is an initiating buying tail. There are 2 single prints at 4184-85 and that’s above the previous day’s value area. People are paying up and initiating buying activity is being recorded. This is the strongest sign of buying activity.

The next strongest signal is the selling tail at the top of the profile. It’s a tail because there are two single prints left at 4199-4200. It has formed as a result of the other time frame trader responding to higher prices which is quite normal, anticipated, activity.

The range extension to higher prices is an initiating buying range extension. Initiating because it’s above the previous value area and buying because it’s the result of a move higher from the initial balance. This is a strong signal because it is an initiating signal.

The tpo count, which is actually the weakest of the three types of signals, in this case has a slight bias to the sell side. There are more tpo’s (28) above the point of control than below it (26) and therefore sellers were more active than buyers, on the day. The value area is above the previous day’s value area and that makes it responsive. It’s a responsive selling tpo count, but we can also see that the strength of this signal may well be in the degree of difference. At 28/26 it’s a fairly even match, but if it were something more like 32/14 then we’d have to view that as stronger selling activity.

Putting all the signals for the single day together, on face value, the initiating buying (IB) tail is a stronger signal than the responsive selling (RS) tail, by virtue of the definition of initiating and responsive activity. The initiating buying (IB) range extension is weaker than the initiating buying (IB) tail, but potentially a little stronger than the responsive (RS) tail. It’s also stronger than the responsive selling (RS) tpo count, which is the weakest signal of all.

We can therefore assume that the next session will probably see the market trading at higher prices. Of course, we’d be better informed if we could see this in context of recent market activity and that’s exactly what the long term auction chart attempts to do.

Fig 109

Sure enough the next day, the day of the 14th, the market was up. We’ll deal more with how to look at the long term auction chart in the next issue.

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Craig MacLean is a Futures Adviser Licensed under the Australian Securities Commission, Corporations Law. The writer accepts no responsibility for any losses incurred from any action or inaction derived from the advice in this report.